Archive for August, 2004
As Greenspan sips through long reams of obscure economic data (are cardboard production data a good leading indicator of economic activity?) while relaxing daily in his bathtub, he is pondering whether he should increase the Fed Funds rate at the September 21st FOMC meeting. Here is what he is mumbling in his mind, in between a bubble bath and endless wonky economic statistics:
“Well, the September 21st decision will be a real tough one, the last one before the elections! I thought that the economy was perking up; and then we hit this Q2 “soft patch”! But is it really a soft patch as we have been claiming in public or the beginning of a deeper deceleration of the U.S. and global economy? Japan is also slowing down (see the latest GDP, employment, housing spending and deflation figures) and figures from Europe are the usual mixed bag with overall softness and a sub-part Q2 growth of 2%. So, I am usally as kriptic in public as Delphi’s oracle but on this one I am a bit schizophrenic myself even in private. I haven’t really figured out what to do! I feel like Hamlet: to raise or not to raise?
Following the recent update of the site that included seven new sections on sovereign debt issues, we are now adding twelve additional sections on emerging market vulnerabilities.
Recent financial crises in emerging market economies have taken the form of some combination of currency crises, sovereign debt crises, banking crises and systemic corporate crises. As we have already extensively covered sovereign debt issues some of the new sections are on currency crises, banking crises and systemic corporate crises.
The two new sections on currency crises cover the theoretical and empirical literature on such crises, their causes, dynamics and effects. The three new sections on banking cover the causes of bank runs and systemic banking crises, the resolution of systemic banking crises and the issue of the implications of deposit insurance (including the related moral hazard issues). Additionally, two sections cover the question of the determinants of capital flows to emerging market economies (including the risks of hot money, sudden stops and capital account reversals) and the debate on capital controls as a way to prevent crises, avoid excessive capital inflows and outflows and as crisis resolution tool. Since liability dollarization and “original sin” appear to be endemic features of emerging market economies, we also created a new section on liability dollarization and how to deal with it. As emerging market economies need to appropriately manage their public debt, both domestic and external, to reduce various balance sheet vulnerabilities, we have also added a new section on public debt management.
The usually sharp Martin Wolf of the FT has recently come out in favor of a single global currency for all countries:
Martin Wolf “We Need a Global Currency” “Last month was the 60th anniversary of the conference at Bretton Woods, New Hampshire, that inaugurated the post-second world war international economic order. The flood of analysis that this occasion brought forth has concentrated on that meeting’s institutional progeny: the International Monetary Fund and the World Bank. But a bigger question needs to be addressed. It is whether floating exchange rates have proved to be the ideal replacement for the unsustainable adjustable exchange-rate pegs of the Bretton Woods monetary regime. The answer is: no.
Dept. of the Delayed Press: John Berry and Martin Wolf today on the Unsustainable US Current Account Deficit
Good to see that, after my blog item the other day on the US current account deficit unsustainability, where I bemoaned the press for its oversight of the Fed/FOMC concerns, the leading Fed watcher John Berry picked up today the story of the Fed discussing the US current account deficit and Martin Wolf from the FT also wrote today an important piece on the unsustainable US twin deficits (“America on the Comfortable Path to Ruin”).
Missed by most of the media in its reporting of last week’s FOMC Fed Funds increase decision was a most interesting nugget from the Minutes of the June 29-30 FOMC meeting. At that meeting, the FOMC discussed staff papers and presentations on the US current account deficit; the conclusion from the ensuing discussion was that:
“The staff noted that outsized external deficits could not be sustained indefinitely….the possibility that the adjustment could involve more wrenching changes could not be ruled out.”
The analysis, as usual for the Fed, was cautiously couched and included all the caveats that “the historical evidence indicated that such deficits could be quite persistent, and the adjustment of imbalances was not necessarily imminent. The adjustment, once under way, might well proceed in a relatively benign fashion”.
As I extensively discuss in my new book with Brad Setser “Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies” sovereign debt crises have become more frequent in last decade.
We have had cases of outright sovereign default (Russia, Ecuador, Argentina), cases where the sovereign debt has been semi-coercively restructured/rescheduled under the threat of default (Pakistan, Ukraine, Uruguay) and cases where sovereign debt service distress has been avoided only through a very large IMF loan package (Mexico, twice in Brazil in 1999 and 2001-2003, Turkey, Uruguay).
Thus, as also stressed by Rogoff, Reinhart and Savastano, sovereign debt defaults and “debt intolerance” are on the rise.
My new book with Brad Setser on “Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies” will be published in late August.
I have recently finished a new book with Brad Setser on “Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies”.
The book is being published this month by the Institute for International Economics, jointly with the Council on Foreign Relations; see this link for a preview of the book.
The book presents a systematic analyisis of all the financial crises in emerging market economies in the last decade, of the debate on how to resolve these crises (IMF “bailouts” or bail-ins of private creditors?) and the reform of the international financial architecture after the Mexican and Asian crises. Bailouts refers to IMF rescue packages to countries in financial distress while the term “bail-in” refers to semi-coercive restructurings/reschedulings/reductions of sovereign debts – bank loans, bonds and other claims – owed to private (foreign) creditors. Bail-ins are also at times referred to a PSI or Private Sector Involvement in crisis resolution in the official wonky lingo of the G7/IMF.
The high oil prices of the last few weeks have led to concerns about a U.S. and global growth slowdown. Most analysts believe that the oil shock may slow down U.S. growth and growth in oil importing countries, but that it will not lead to another U.S. and global recession. But, the last four U.S. and global recessions in the last three decades have been associated with oil price shocks driven by political shocks: the Yom Kippur War of 1973 led to the global recession of 1974; the Iranian Revolution of 1979 led to the recession of 1980; the 1990 invasion of Kuwait by Iraq led to the 1990-91 recession; and part of the late 2000 slowdown and 2001 recession was exacerbated by the 2000 oil shock where Middle East tensions (the second Palestinian intifada) and other factors led to a spike in the oil price in late 2000. Even the spike in oil prices in early 2003 (right before the latest Iraqi war), while not causing a recession, contributed to the significant economic slowdown of the first half of 2003. Thus, shouldn’t we worry that the latest spike in oil prices will cause another U.S. and global recession? As in any economic argument, you can give your two-handed answer as this price shock has similarities and differences relative to other episodes where a recession did follow the shock. But there are many reasons to worry that analystis are again underestimating the impact of the latest oil shock. Yes, we are sort of less dependent on oil than in the 1970s; yes, real oil prices are lower now than in the two 1970s shock. But there are many other reasons why this latest oil shock may have a larger impact on growth than expected by most. I flesh out these arguments in more detail in my recent paper with Brad Setser “The Effect of the Recent Oil Price Shock on the US and Global Economy” (August 2004). In summary, oil shocks have been underestimated in terms of their impact in the past; and they may be underestimated again today.
today I am starting my Blog that will cover and discuss international macroeconomic topics, the wide range of international macro policy issues that you are familiar with in my Global Macro Web Site. This site has been around since 1997 and was ranked as the #1 Web site in Economics in the world by The Economist magazine in 1999 (one of the many awards the site has received over the years). Since then we have regularly added new topics, countries and subject matters. And by now, the site has over 150,000 unique visitors per quarter from all over the world, a quite remarkable achievement. Your comments and suggestions for new topics and subjects would be most welcome to me. I look forward to regularly (hopefully daily) add commentary on global macro policy in this blog. Your comments and feedback will give us an opportunity to start a dialogue on these important subject matters that are currently not seriously covered by any blog I know of. So, stay tuned and let us start the fun!